With $76M Second Fund, Root Ventures Investing in Hardware, Automation

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Startups often struggle to attract their first funding from venture capital firms. But some of those VC firms are startups themselves, hoping to draw investors willing to trust their judgment so they can back young companies that take off.

Avidan Ross, a former industrial robot designer and financial firm CTO, was the solo founder of seed fund Root Ventures in 2015, when he had $31.4 million to spread around. Now, with 21 companies in Root’s portfolio and four exits—including startups acquired by Spotify (Preact) and Hewlett Packard Enterprise (Cape Networks)—the firm is announcing a second fund that is more than double the first fund’s size, at $76.7 million.

San Francisco-based Root’s declared mission is to work with founders who are deeply experienced in hardware and software development, and are eager to transform the technology landscape in robotics, hardware, and industrial automation.

Like other VC firms, Root holds out more than just the prospect of funding to the startup founders whose ideas it wants to hear—the firm also offers support and consultation, especially in areas such as technical design, manufacturing, and hardware. Ross is now one of three partners at Root, having been joined early on by Kane Hsieh, a former software engineer, Microsoft project manager, and co-founder of Brilliant Bicycles. The third partner is Stanford engineering alum Chrissy Meyer, who worked on hardware development at Apple and Square. Root boasts a machine shop and all-day office hours at its Mission District space, with the beverages to match—from a “custom-built, wifi-powered coffee bar” to an Alexa-powered beer dispensing robot.

Hsieh, who joined Root shortly after its launch, says the firm’s focus on seed funding, and the personal dedication of its partners to entrepreneurs, give it an advantage in attracting promising entrepreneurs. “We are able to endear ourselves to the tech founders we really want to work with,” he says.

Root co-invests with other seed funds and early-stage venture capital firms in small syndicates of two to three “strong, committed investors,” Hsieh says. It has frequently co-invested with Semil Shah’s Haystack Fund, and with larger firms, Spark Capital and Lux Capital.

“We’re seeing more later-stage funds writing checks into our rounds,” Hsieh says. Root wants to work with such big players, he says, because each firm brings its own expertise to the table as they help build strong companies.

Root’s average initial investment from its first fund was $500,000. With the second fund, that goes up to $1 million per portfolio company, Hsieh says. The firm expects to back 20 to 25 startups over a period of two to three years, and then continue to back the ones gaining traction.

“Two-thirds of our fund is reserved for follow-on funding, to double down on the winners in our portfolio,” Hsieh says. Root doesn’t contemplate dropping out in later fundraising rounds unless it has to. “The hope is that we will be able to invest our pro rata share as far as our companies will let us,” he says. (Investing the pro rata share allows investors to maintain the same percentage of ownership in a company from one funding round to another.)

Dedicated seed funds such as Root face a complex competitive environment. On top of small seed funds and angel investors, later-stage venture capital firms are also on the hunt for early-stage startups. Silicon Valley heavyweight Sequoia Capital closed a $180 million seed fund in January, and has incentivized more than a hundred scouts to comb their professional networks for promising founders, TechCrunch reported. On the other hand, venture funding patterns overall point to a decline in early-stage funding in favor of larger and fewer late-stage investments.

Hsieh says the partners at Root mull over this mixed picture, and find it hard to say how it will affect the firm’s prospects. “That’s the existential question we ask ourselves every day,” he says.

But there are some positive trends that could work to Root’s advantage—and that of its portfolio companies. In the past, Hsieh says, it’s been more difficult for hardware companies than for other tech startups to sustain a steady pace of fundraising after they score their seed-stage and early investments, he says.

“But the gap is shrinking,” Hsieh says. “That’s the opportunity.”

Photo courtesy of Root Ventures

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy